Real estate and infrastructure are expected to remain the most popular of all the real asset sectors in 2019, despite increasing leverage in real estate and slow distributions in infrastructure, industry executives say.

The new year is expected to build on the asset classes’ popularity in 2018.

In 2018 as of Dec. 20, infrastructure funds raised a total of $83.8 billion worldwide, compared to 88 funds that closed on $75.1 billion in all of 2017, a record year in terms of total capital raised by infrastructure funds, according to London-based alternative investment research firm Preqin.

Capital is also expected to continue to flow into real estate. Through Dec. 20, real estate funds raised $94 billion in 212 funds, compared to $126 billion raised by 379 funds in all of 2017, Preqin data show.

The combined $197.5 billion raised by real estate and infrastructure funds amounted to 90% of the $219.3 billion raised in real asset funds in the same time period.

Aside from real estate and infrastructure, fundraising efforts in other real asset sectors, including energy, agriculture, metals and mining, and farmland, “continue to be challenged,” Mr. Burnett said.

He expects these trends to continue into 2019.

“In energy, there is lots of volatility at the commodity price level,” he said. “Returns have been disappointing. It’s been a challenging exit environment.”

There still will be good energy investment opportunities, but investors have to be selective where they invest capital, Mr. Burnett said.

Bright spots

Overall, there could be a few bright spots for real asset investments. “The macro trends are supportive for senior housing, industrial, data centers and cell towers,” Mr. Burnett said.

There is also increased institutional investor interest in investing in water ,but “the real challenge is monetization,” he said.

There is “headline risk” in taking water from one place to another. Instead, there could be a way to divert the excess water created by sustainable farming, for example, for use by cities and counties, Mr. Burnett said. Some state and local water districts are proposing plans, but it is very state, county and city specific, Mr. Burnett said.

A growing number of institutional investors are expected to look for ways to invest directly in energy, said Gordon Huddleston, partner and co-president at Aethon Energy Management LLC, an oil and gas manager, operator and developer focused on direct investments in North American onshore oil and gas.

Its latest fund, Aethon III, is an investment vehicle formed to acquire onshore North American assets in partnership with the C$193.9 billion ($145.2 billion) Ontario Teachers’ Pension Plan, Toronto, and private equity firm Redbird Capital Partners LLC.

“There’s been a desire to eliminate intermediaries regardless of asset class,” said Albert Huddleston, partner, CEO and founder of Aethon.

Added Gordon Huddleston, “Energy lends itself uniquely to direct investing. … Next year, I am seeing a lot of direct investment interest.”

Agriculture to suffer

Agriculture is expected to suffer in 2019 from lack of investor interest, industry executives say. U.S. tariffs have a disproportionate ability to affect agriculture properties, Hamilton Lane’s Mr. Burnett said.

“(Tariffs) inject another level of uncertainty for non-U.S. markets. Asia has been a key market for row crops,” such as soybeans, Mr. Burnett said. Asia also has been a key growth market for fruit such as apples and cherries, he said.

“The tariffs have injected a new level of uncertainty around the long-term value of those assets,” Mr. Burnett said.

Another factor making agriculture less attractive to investors is that until six to nine months ago, the land values were rising faster than the expected income derived from the investment, he said.

“This relationship is unsustainable, as land values should reflect their prospective ability to generate income,” Mr. Burnett said.

Only recently have land values started to soften a bit to reflect lower income expectations, he said.

“This, coupled with the tariff impacts makes us cautious and highly selective on agriculture investments,” Mr. Burnett explained.

As for infrastructure, a growing theme for investors into 2019 is that they want more distributions from their infrastructure investments, Mr. Burnett said. Infrastructure distributions have been lower than other real assets, he said.

Most infrastructure funds are similar to private equity funds, he said. They have the same fund lives as private equity funds and a strategy to buy, fix and sell, and so investors want to see some realizations, he added.

Many infrastructure managers such as IFM Investors are not only making equity investments but also are investing in credit.

“In the past 12 months, most competitors were promoting mezzanine but now more funds are in the market focusing on senior secured,” said Rich Randall, New York-based executive director, global head of debt investments at infrastructure manager IFM Investors.

Senior secured loans provide lower returns than mezzanine but are seen as safer, he said.

While issues in the broader economy could affect the infrastructure sector, which tends to be fairly resilient, he expects a resolution of the U.K.’s withdrawal from the European Union next year could unleash a backlog of infrastructure deals in Europe.

Macroeconomic issues

Real estate managers are also considering the impact of macroeconomic issues on their portfolios in 2019.

In the past few months, “all of the volatility and noise” in the stock and bond markets came in response to macroeconomic problems such as the U.S.-China trade wars and Brexit, said Jacques Gordon, Chicago-based global strategist at real estate manager LaSalle Investment Management.

Although the hotel sector will react immediately, the rest of the real estate sectors “are insulated from a lot of that noise.”

What LaSalle executives do worry about is volatility, which combined with rising interest rates, wage inflation, weakening of the housing market, and high levels of household and student debt could lead to a gradual slowdown in the U.S. economy in 2019 and 2020, with the potential for a mild recession in 2021.

“We’ve been warning clients about volatility for two years in a row. This is the third year,” Mr. Gordon said.

Still, as long as the economic growth “tapers, rather than plunges” real estate should perform well, a recent LaSalle report states.

Brad Case, Washington-based senior vice president at industry group Nareit, said in an interview he is “sanguine about the macroeconomic” factors because he is optimistic commercial real estate can withstand those risks.

He said he would be more concerned if there were more than a few pockets of oversupply.

Indeed, the pace of new construction remains below the level of a little more than 1.5% of GDP that was typical before the construction collapse that began in 2008, he said in Nareit’s economic outlook for 2019.